ATO Ruling TR 2023/3: Impact on deductibility of holding vacant land expenses

The Australian Taxation Office (ATO) has finalised Taxation Ruling TR 2023/3, an update to the draft ruling TR 2021/D5. This ruling, effective from 1 July 2019, focuses on the deductibility of expenses related to holding so called “vacant” land. Taxpayers considering holding or investing in land need to understand the implications of this ruling.

Summary

Section 26-102 of the Income Tax Assessment Act 1997 denies land holding cost deductions where there is no substantial and permanent structure in use or available for use on the land. Various exceptions apply, including where the land is in use for carrying on a business, or the taxpayer is a company. Ruling TR 2023/3 clarifies the ATO’s view on Section 26-102 and provides examples to illustrate its application.

The main points of this ruling are:

• deductions are permissible only when the land is actively used in income-generating business activities or meets specific criteria, such as having a substantial and permanent structure.
• the structure must be in use or available for use.  Residential premises constructed or substantially renovated must be lawfully able to be occupied and this would occur when the certificate of occupancy is received
• various exceptions are provided, including for corporate entities and certain trusts
• property developers would typically be carrying on a business – however not always where the land is owned in a Special Purpose Vehicle (SPV)
• the relevant area of land for the purposes of section 26-102 is determined by the area that the relevant loss or outgoing relates
• the timing of expenses and income-earning activities is important in determining the deductibility of interest expenses.

Key Concepts

Structure in use or available for use

Section 26-102 specifies that deductions are permissible only when the land is actively used in income-generating business activities or meets specific criteria, such as having a substantial and permanent structure. A substantial and permanent structure is one that is fixed to the land and has a degree of durability and permanence. Examples of such structures include buildings, sheds, silos, windmills, and solar panels.

Carrying on a business and property developers

Section 26-102 does not apply where the taxpayer is using the land in carrying on a business. The Ruling states that whether activities on the land amount to ‘carrying on a business’ is a question of fact’.  Property developers will generally not be affected by Section 26-102 provided they are carrying on a business.  Land held by a developer for future development would be considered ‘available for use’. 

However, where land is held in an SPV (with no other activities), special consideration should be given to whether the SPV is carrying on a business. 

Relevant Area and multiple titles

The Ruling provides some practical guidance where holding costs relate to:

• Only a portion of the land under a single title, or
• Across multiple titles

Where the holding costs relate to only part of the land under a property title then for the purposes of determining if there is a substantial and permanent structure on the land, it is sufficient that such a structure exists somewhere on that part of the land. The structure does not need to take up all of that part of the land or all the land under the property title.

Where the holding costs relate to land held under multiple titles, the Ruling states that it will be sufficient where a substantial and permanent structure exists somewhere on the area of land to which the loss or outgoing relates.

Implications

The deductibility of holding costs becomes more complex for non corporate taxpayers.

Individuals may find their ability to claim deductions for holding costs like property taxes and loan interest limited, depending on the land’s usage. The ruling narrows the scope for claiming these deductions, making the land’s actual usage a pivotal factor.

Companies have a distinct advantage when it comes to deductions for holding vacant land. Corporate tax entities are generally exempt from limitations on claiming deductions for holding costs of vacant land during the income year in which the loss or outgoing is incurred. This exemption provides these companies with greater flexibility in their tax planning strategies, allowing them to optimise their tax position while holding vacant land for business purposes.

When vacant land is held in a SPV the situation becomes complex. If the SPV is not a company (or owned by companies), the SPV must meet specific criteria to be eligible for deductions, such as actively using the land or making it available for use in a business. Failure to meet these criteria could result in the SPV being ineligible to claim deductions for holding costs, which could have significant tax implications.

Example: Holding Land in a Company vs. a Discretionary Trust

The following table compares the situations of holding land in a company versus a discretionary trust:

Actions required

1. Review Current Holdings: Examine your vacant land holdings to assess how the ruling impacts your ability to claim deductions
2. Analyse Business Activities of land owners (particularly SPVs): Determine whether you are entitled to rely on the carrying on a business exemption and whether SPVs would qualify
3. Documentation: Ensure proper documentation is in place to substantiate any claims for deductions
4. Strategic Planning: Re-evaluate your long-term investment or business strategies in light of this ruling and make necessary adjustments.

How SW can help

Understanding the application of TR 2023/3 is essential for anyone holding or planning to hold vacant land. Keeping abreast of these rules and seeking professional advice can save both time and money, helping to avoid potential pitfalls down the line.  Our expert team is here to support you every step of the way.

Contributor

Rahul Sanghani